Can telehealth startups fill the gap in adolescent mental healthcare?

Telehealth startups—which have been struggling to get back on stable footing after coming down from a pandemic-fueled boom—are eyeing adolescent mental healthcare as a growing opportunity. After the surgeon general’s report on the loneliness epidemic in the US—which cited that one in three young people struggle with mental illness—some investors believe tech startups could serve an unmet need.

But startups face a significant challenge in maintaining investors’ interest: Telehealth VC investment has dropped over 80% from its peak of $2.2 billion globally in Q1 2021 to $433 million in Q1 2023, according to PitchBook data. The teletherapy and behavioral health subsegment generated almost $800 million in deal value at its peak.

Daybreak Health, which works directly with schools to provide students with mental healthcare services and providers, has grown from working with six public schools to over 60 over the past 18 months. The company operates in Texas, California and Oregon.

“We had the proof, and we had this national movement that we were riding,” said Daybreak co-founder Alex Alvarado. The company just raised a $13 million Series B round led by Union Square Ventures with backing from Lux Capital, Lightspeed and others. The company was valued at $65 million in the round, up from $45 million last year, according to PitchBook data.

Brightline, a pediatric mental healthcare startup, raised $105 million recently from Google Ventures, PE giant KKR, and insurance company Blue Cross Blue Shield. School-based teletherapy startup Hazel raised $51.5 million in 2022 and expanded its services to 14 states. Sequoia-backed Summer Health, started by former Hims and Hers Health executives, recently raised $7.5 million from Lux Capital.

The Biden administration recently awarded $42 million in grants for schools to invest in mental health services. And educators are eager adopters, according to Alvarado. The San Diego Unified School District is Daybreak’s largest client, and the company operates in schools with over a million students.

Navigating challenges

But the current fundraising environment and complexities of dealing with rules and regulations for individual school districts present significant hurdles. Alvarado and co-founder Sid Cidambi had many discussions on whether they wanted to try and fundraise at all. Both were concerned they’d have less-than-ideal terms for the round. “We had enough capital that if the term sheet came back on terms that were not optimal for us, we didn’t have to do,” Cidambi said.

Some investors think that these challenges make it less lucrative. Eric Epstein, a principal at Sante Ventures, said that adolescent mental healthcare’s deep complexity is a red flag for investors. Epstein pointed to the protected class status of minors, the diverse needs of mental health patients, and the challenge of distributing services through parents and schools as reasons he isn’t surprised there hasn’t been a breakthrough in the space.

“From a business perspective, you have patients or customers who don’t have disposable income; they aren’t the purchaser, which is a challenge. And if my school is giving me access to this platform, am I really going to want to use it?” Epstein said. “There’s not going to be a one-size-fits-all approach. The mental health problems of a 10-year-old are different from a 14-year-old, so [how] do you develop a product that’s clinically effective?”

Pavan Choksi, a partner at Arkitekt Ventures, which invested in Handspring, a provider of mental healthcare services for young people, said that he believes there’s plenty of upside for investors and insurance companies, but it’s all dependent on backing the right model.

“You can’t do virtual alone for adolescent mental healthcare,” Choksi said. He added that hybrid models, like the one Handspring uses with in-person and virtual sessions, are preferred by therapists and insurers, in addition to yielding better outcomes.

“The payers [insurance companies] are asking for hybrid models. If you can avoid someone going to the ER and save them money, it creates this business model that they embrace.”

“These kinds of startups are underrepresented in overall healthcare funding, despite an acute and growing need,” said PitchBook analyst Aaron DeGagne. “A focus on younger populations can easily create a niche compared to general population care providers.”

More than just servicing a need or netting a profit, Choski says that investing in youth mental healthcare is good for all facets of business. “You are directly investing in the next generation—the rest of your portfolio also benefits. You have a generation of folks willing to engage in your companies while you’re also doing good.”